Why the Only Real Way to Buy Bitcoins Is on the Streets

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Why the Only Real Way to Buy Bitcoins Is on the Streets

A Buttonwood meetup in San Francisco.

Photo: Ariel Zambelich/Wired

On a damp Thursday night in July, a half-dozen men gather on the steps of San Francisco's Yerba Buena Gardens, just across from St. Patrick Church on Mission Street. They dress down, mostly wearing the jeans and t-shirts uniform of Bay Area programmers. As the sun sets, they're trading currency in the fog, selling silver and cash for Bitcoins and other crypto-currencies. Every now and then a new trader wanders by, asking, "Buttonwood?"

Welcome to the quickest, most private way to buy the internet's most successful digital currency: in-person and face-to-face.

Buttonwood meetups started in New York a few months ago and fanned out to San Francisco and Los Angeles. Buttonwood is an allusion to the May 17, 1792 agreement, struck under a buttonwood tree at 68 Wall Street, that set down the rules for what became the New York Stock Exchange. The Yerba Buena Bitcoiners see themselves as the modern descendants of these 18th century traders. Like them, they conduct their business in the open and face-to-face.

They also think they're onto something big. They're Bitcoin's true believers, and they're excited to be in on the ground floor. "It's like a new country formed, and they need everything," says John Light, the Bitcoin entrepreneur who organized the San Francisco Buttonwood meetup.

He packed up and moved to the Bay Area from the Washington suburb of Springfield, Virginia, in January, hoping to cash in on the Bitcoin excitement. For him, the event is a return to Bitcoin's roots. "For me it was really about decentralizing the exchange process and giving people an easy way to buy and sell Bitcoins."

>It's like a new country formed, and they need everything.

John Light

A few minutes after I arrive, Zach Copley is looking for a buyer for his two American Eagle silver coins, worth about $27 each on eBay. Everyone is chatting and compulsively checking market updates on their mobile phones. Copley, a bearded 44-year-old "crypto currency enthusiast" with an orange shirt depicting a bomber dropping Bitcoins, asks Light if he'll take them for $56. Light thinks they're worth only $44. After some haggling, Light types Copley's Bitcoin address into his mobile phone and transfers just over half a Bitcoin ($50) to Copley's digital wallet.

These aren't big value transactions, but the Buttonwood crew aren't big-time traders. They're the enthusiasts and the curious, dipping their toes in the world of crypto currencies. They want to meet other like-minded people and trade. Copley tells me he'd rather do everything online, but he's had his online payments reversed by the banks. Meeting face-to-face and leaving with cash (or Bitcoins) in hand is safer. "The easiest and most profitable are the online [trades], however, they're also the most risky," he says.

It's a little unexpected: The world's pre-eminent digital currency is most safely traded face-to-face. But the Bitcoin phenomenon is itself unexpected. Bitcoins were conceived in 2009, in the warm ashes of the world financial meltdown. But they were proposed in a white paper and caught on without the backing of any central authority. In fact, the currency was a reaction against the too-big-to-fail banks that had inflated, and then abruptly paralyzed, the world's economy.

A mathematical genius (some say it had to have been a group of people) under the pseudonym Satoshi Nakamoto first proposed the Bitcoin peer-to-peer network as a way of conducting online transactions without relying on financial institutions and all of their baggage – defaults, clawed-back transactions, service charges, their lack of privacy. "Merchants must be wary of their customers, hassling them for more information than they would otherwise need," Nakamoto wrote in the academic paper explaining how his homemade currency would work, "but no mechanism exists to make payments over a communications channel without a trusted party."

Bitcoin is that mechanism. And four years later, it does what Nakamoto envisioned. The peer-to-peer network that keeps track of the "Blockchain," a running ledger of Bitcoin transactions, is massive. There are over 11.4 million Bitcoins in circulation. They're worth about $90 each, putting the value of the Bitcoin economy at more than $1 billion. But there's a catch. How do people first acquire Bitcoins? How do they sell them for U.S. dollars? "There's a lot of anxiety and angst around the actual buying of Bitcoins," says Light. To use the Mt. Gox exchange, for example, you have to submit photo ID and proof of residency before you can create an account. Processing new accounts can take weeks. Once your account is online, it still takes days to move money in and out of the account. Last month, Mt. Gox temporarily suspended money transfers to U.S. bank accounts. "Those waits can cause anxiety when there are delays or when the companies simply stop doing withdrawals or deposits for a period of time," Light says.

It's traditionally been tough to quickly buy Bitcoins with U.S. dollars, and recently it's become tougher. Regulators at the federal and state level have made it clear that anyone engaged in the business of swapping Bitcoins for cash needs to know who their customers are in order to comply with anti-money laundering laws. That's led to a pretty healthy off-the-books market for Bitcoin traders. Ground zero for this business is a website called Localbitcoins.com, but buyers and sellers can also hook up over Internet Relay Chat at #bitcoin-otc

John Light checks his laptop before preparing to sell some Bitcoins.

Photo: Ariel Zambelich/Wired

John Light (far left) sells Bitcoins to Zach Copley in exchange for silver.

Photo: Ariel Zambelich/Wired

Localbitcoins.com operates a bit like the Bitcoin world's eBay. It's a marketplace. The site makes its money off of advertising fees, as it brings together buyers and sellers for face-to-face deals, and also for sales over the internet. I heard about it from a Las Vegas trader named Mark Russell, who told me in May that he was using it to run his own over-the-counter business. He'd earned a reputation as a reliable Las Vegas trader who could be counted on for large Bitcoin deals. On his Localbitcoins page, Russell says that he is no longer trading Bitcoins (his business partner told me that he'd been served with a cease and desist letter and was now working on another venture – a bitcoin ATM machine called Robocoin that he hopes to launch in Canada next month) but he had been offering trades between $5,000 and $50,000, with his cut starting at 5 percent.

Most of the San Francisco Bay Area traders on Localbitcoins.com won't trade for less than $200, and when I try out the service, the handful of small-scale sellers I do find are hard to reach. One eventually gets back to me and agrees to meet at a trendy Mission District coffee house on 24th street called Haus. Over tea and a latte, he pulls out his MacBook and I wait as his Bitcoin client syncs up with the network. I explain that I'm writing a story and he's OK with selling me Bitcoins, but he doesn't want me to use his name in this story. He doesn't need the attention, he says. He's unloading Bitcoins because people have been paying him in Bitcoins for software he wrote, and selling face-to-face is the only way to keep things off the books. Like John Light, he runs the full Bitcoin peer-to-peer client on his laptop, but the sheer volume of Bitcoin transactions this days are making this unworkable. He'd been out of town for a few weeks beforehand, and his client was un-synched. It took 40 minutes to catch up to the blockchain before he headed over to the cafe. And now we have to wait a few more minutes for the laptop to synch up again on the wireless network at the cafe.

Then I hand over $20 and I email him my Bitcoin address. He sends me the coins and we wait. Bitcoin transactions are booked on the peer-to-peer network every 10 minutes, so it can take awhile to confirm your deal really has gone through. There's often a minor glitch with these face-to-face transactions. Once, the smartphone software I was using cut-and-pasted my Bitcoin address as a URL, which was rejected by the Bitcoin network. A week earlier, another seller I'd met at a local Bitcoin meetup scanned a QR code on my mobile phone and tried to send the Bitcoins to that address. But it took him several tries to complete the scan and close the transaction. Neither of us knew exactly why, but I sat across from him in a crowded room of people, itching to hand over the $20 bill in my hand. It felt slightly illicit.

>I do often wonder what it looks like from the outside... We're sitting here at this table drinking our coffee, eating our baguettes or whatever, and the other person will hand me a wad of cash.

Chris Rico

The slightly illicit feeling to it all is part of the baggage of being a hot new alternative digital currency. Software developer Chris Rico has been selling and buying Bitcoins at a Saint Louis Bread Company location in St. Louis's Tower Grove district for nearly a year. "I do often wonder what it looks like from the outside," he says. "We're sitting here at this table drinking our coffee, eating our baguettes or whatever, and the other person will hand me a wad of cash. We'll fiddle with our phones for a minute and then we'll walk off."

These Bitcoin deals sometimes feel illicit because they are.

This much was true one Tuesday night at the Uptown Bar in San Francisco's Mission District. As the American League wins baseball's All-Star game on television, a college student – he's asked us not to identify him – waits for his Bitcoin connection. After a few minutes, a 30-something white guy in baggy jeans and a loose hoodie comes in and orders a Tecate. Then he takes out an Android phone and puts it on his lap. The buyer takes out a envelope of cash and hands it over for counting. Ten minutes later, the Bitcoin seller is gone, and the college student says he's going to use the 14 Bitcoins he's just picked up to buy MDMA on the Silk Road.

This is his second face-to-face buy. The previous one was from a guy in his mid-60s at a local Starbucks. He used to buy and sell on a (temporarily shuttered) marketplace called Bitinstant. But a few months ago, "it started to ask for too much of my information," the student says. Given the nature of his business, he wants to buy Bitcoins without being tracked. "Localbitcoin is the last anonymous way of doing it," he says.

These are the kinds of deals that have regulators worried. But if you ask state or federal regulators whether people who are trading Bitcoins in person need to register as money lenders, it's impossible to get a definitive answer.

Do the Buttonwood traders need to register as money transmitters? "It depends," says Steve Hudak, a spokesman with the Treasury Department's Financial Crimes Enforcement Network (FinCEN). This is the department that sets the regulations designed to keep the crooks out of the U.S. financial situation, and it's had an uneasy relationship with Bitcoin companies. In May, Mt. Gox had a U.S. bank account shut down because the feds said it did not comply with FinCEN guidelines.

But according to Hudak, some face-to-face traders probably need to register with the federal government as money transmitters. But there's no hard and fast rule about who needs to register. The difference, he says, is how serious you are about trading cash for Bitcoins. "FinCEN is primarily concerned with those who are making a business out of exchanging Bitcoins for money," he says. "Depending on the facts or circumstances of the activity, they may need to register as a money transmitter."

Al (last name withheld) pays Dan Held cash for Bitcoins at the Buttonwood meetup.

Photo: Ariel Zambelich/Wired

"Handling cash is expensive, it's painful.... if you didn't have to handle cash, you'd mop the floors when you're done and close the shop." – Adam Sah.

Photo: Ariel Zambelich/Wired

At the Buyer's Best Friend Mercato in North Beach, you can try out stone ground organic chocolate, pick up a box of Vata teabags, or pick up a two-pound bag of sprouted wheat flour. If you want, you can buy a few Bitcoins, too.

I learn about this on Localbitcoins.com and decided to walk into my local Buyer's Best Friend, just a few blocks from my home. It's my first time in Buyer's Best Friend. Tourists looking for an early lunch walk in the sun along Columbus Avenue, mingling with locals running errands. I step inside the tiny shop and have no idea what to do. There are packages everywhere, and yet I don't recognize a single brand. That's the store's specialty: High quality niche groceries. I walk to the cashier.

"I heard that you guys sell Bitcoins. Can I get some here?"

She says yes, but has no idea how to sell them. Can I wait, she asks. She calls the company's founder, an ex-Googler named Adam Sah who explains things to me on the telephone. I hand the clerk a $20 bill. She hands me a sharpie. I write my email address on a paper towel. The clerk tells me I'm her first-ever Bitcoin buyer. She's a photographer, but she only does film photography, she says. "Digital doesn't really exist," she tells me.

A few minutes after I leave the store, Sah sends me a sixth of a Bitcoin using an online service called Coinbase.

Later, we meet up face-to-face and Sah tells me that he's smoothed out his system. No more paper towels. And he says that technically, my Bitcoin buy was a violation of company policy. Buyer's Best Friend will give you Bitcoins back for cash, much like you can get cash back from a credit card, but you are supposed to purchase something first.

For Sah, the Bitcoin trading is not a line of business; it's way to get customers in the door. "Right now it's all experimental," he says. "For me it's all about attracting new customers." With some word of mouth buzz, and a listing on Localbitcoins.com, Buyer's Best Friend does about two to three Bitcoins worth of sales each day.

By the time I hit the Buttonwood meetup, a few weeks after Buyer's Best Friend, I've done three separate Bitcoin buys. So when I meet John Light, I decide it's time to sell. But by now, I don't want cash, I want to get ahead on the next big crypto-currency trend. "Got any Litecoin?" I ask him. He does, but I don't yet have a Litecoin wallet. And neither of us can figure out how to set one up on my iPhone. So I do something I'd probably never do over the internet. I trust him and send him the Bitcoins. Light says he'll send me six-and-two-thirds Litecoins just as soon as I set up my wallet.

Three days later, I install the full Litecoin client on my PC and send him my address. It takes a few hours for the peer-to-peer software to download the entire history of the Litecoin blockchain and synch up with the network. But for the first time, I'm not trusting a third party like Coinbase to hold onto my wallet. Third parties can go out of business or get hacked, but with the wallet saved on my desktop, everything's up to me. As long as I don't get a keylogger- or a Litecoin-stealing Trojan on my computer, my virtual currency is secure.

Of course, I am trusting John Light not to take the Bitcoins I've given him and run.

A few hours later, the Litecoins come through. Untouched by any bank or exchange, they're delivered via the peer-to-peer network. And though trading an obscure crypto currency may sound very modern, the whole transaction has a decidedly old-fashioned and human flavor to it. Yes, I can almost feel the shade of the Buttonwood tree.**

With additional reporting by Kif Leswing

A sticker on the front window of Mercato shows the various types of payment they'll accept - including Bitcoin.